Nowadays, there is no need to be a large pharmaceutical or aerospace company with heavy R&D activity to claim the R&D Tax Credit. Recent regulations have eased the qualification process, allowing startups to immediately benefit from the valuable tax incentive.
Under the PATH Act (Protecting Americans from Tax Hikes Act), the R&D Tax Credit was officially made permanent on January 1, 2016. The PATH Act has a provision which permits startups to use all the credits, obtained through their constant R&D activity, against their payroll taxes.
Let’s check out why it is a better time than ever before to claim the credit:
Before the PATH Act, the R&D Tax Credits could only be applied to taxes. The problem is that most startups aren’t profitable in their first few years because they are more concentrated in conducting the necessary research and development needed to perfect their product or service. As a result, startups weren’t profitable, didn’t have federal income tax liability and consequently couldn’t use the credit. For this reason, they weren’t benefiting instantly from the tax incentive. At this point, startups could only carry the tax credits forward for possible future use. This is crucial because a startup in its early stages needs the extra cash to reinvest it into their R&D efforts.
The new PATH Act provision allows startups to take advantage of the credit by offsetting a portion of their payroll taxes up to $250,000 annually. Qualifying startups need to have gross receipts of $5 million or less and be in business for five years or less. Eligible startups may use the credit to offset a portion of their payroll tax liability regardless of profitability. Now they can generate immediate value and receive instant financial benefit from this tax incentive.
Does your startup fulfill the requirements stated above? Send us an email at [email protected]. Let us increase your company’s market value and boost its bottom line through the R&D Tax Credit.